The Merkel Memorandum

14th August 2012

"FOR all you know, Angela Merkel is even now contemplating how to break up the euro. Surely Germany's long-suffering chancellor must be tempted, given the endless euro-bickering over rescues that later turn out to be inadequate," so writes the Economist in its latest assessment of the dilemma facing the German Chancellor.

In a spoof memo entitled the "Merkel Memorandum," and "Drafted in utmost secrecy by a few trusted officials for the chancellor's eyes only," the weekly newspaper proceeds to outline what fictional advisers might say in a plan to break up the euro:

"We propose two options. First, the one that may be forced on you anyway: an exit by Greece arising from gross dereliction of its duties under the various bail-out agreements. We have taken as a given that MPs in the Bundestag will not sanction a single euro more in bail-out money to Athens. If that forces the Greeks out, so be it."

"Second, we also consider a wider exit of other countries that have failed the euro test. We think this should include all the states that have already been rescued, or are requesting bail-outs, because those countries share with Greece a fundamental loss of competitiveness and vulnerability to foreign capital flight. This means that they cannot be cured within a reasonable period of time while staying within the euro."

"Of the two options, our judgment is that the larger break-up makes more overall economic sense than an exit of Greece alone. But we must emphasise that the economic and financial risks of it going wrong are much greater, and pushing it through would be an order of magnitude more difficult than co-ordinating an exit by Greece alone."

"Finally, a drawback associated with both options, even if they were to work, is that many of the benefits would lie in the future (by not having to make transfers to peripheral Europe) whereas the costs would be felt here and now-and blamed on you and your government."

In a critique of the piece, however, the National Review's Andrew Stuttaford argues that the Economist's method of pricing its favored solution – a euro-zone-wide deposit-guarantee scheme (and mutualizing a "slug" of debt) takes little account of the longer-term costs of preserving a fundamentally dysfunctional currency union that could hold back the euro-zone's economic progress for decades to come.

"Even to believe that the direct costs could be capped in the way that the Economist suggests is, shall we say, to be very trusting."

"And then there is the political cost. Just how much value does the Economist put on the preservation of what's left of genuine democracy within the EU? Not a lot, it seems…………The mismatch between the aspirations of that political class and the voters they purport to represent is, when it comes to the European "project", hardly a secret. The Economist wants to make it worse."